Offshore

Banks Slash Loans to UK Oil and Gas Sector Amid Windfall Tax Concerns

In an exclusive article by Lukanyo Mnyanda, the Financial Times reported that banks have sharply reduced lending to UK oil and gas producers following the introduction of the windfall tax in 2022, sparking serious concerns about the future viability of the industry.

The windfall tax, known as the Energy Profits Levy (EPL), was implemented following the surge in commodity prices after Russia’s invasion of Ukraine. The tax, along with uncertainty surrounding government policies and environmental pressures, has caused financing challenges for companies operating in the UK’s North Sea.

Investment banks have reported a 40-50% drop in reserve-based lending, a common form of financing for fossil fuel companies that secures loans against future oil revenues. The EPL, which adds a 38% tax on top of existing rates, will bring the total tax burden to 78% by November. The industry is also facing the potential removal of capital expenditure allowances, which could further hinder investment.

Davis Larssen, CEO of Aberdeen-based Proserv, highlighted that this financial strain has extended beyond traditional banks, with even insurance companies reducing support. Independent producers like Ping Petroleum have warned that investing in the UK could become impractical due to the rising tax burden and loss of allowances, potentially leading to a halving of oil and gas production by 2030, according to consultancy Wood Mackenzie.

Additionally, pressure to meet net-zero emission targets has led to major banks and alternative financiers stepping back from the sector. Only a handful of banks continue to lend to UK oil and gas companies, while funding from bond investors and energy traders has also dried up.

UK-based companies such as Ithaca Energy, Serica Energy, and EnQuest have seen a sharp decline in share prices since the end of 2022, in contrast to their Norwegian counterparts, who have benefited from a stable tax regime and policy incentives. Norwegian producers, including Vår Energi and DNO ASA, have outperformed UK firms, despite operating under similar tax rates.

This trend has raised concerns that the UK’s oil and gas industry could face closure before renewable energy sources are ready to take over, potentially creating a significant energy gap.